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Understanding The Differences Between ETPs, ETFs, and ETNs

January 17, 2022

Understanding The Differences Between ETPs, ETFs, and ETNs

In the crypto world, overexposure to any single coin or token can prove fatal at the hands of volatility. One major piece of advice any professional crypto investor or trader can tell you is that putting all your eggs in one basket is a risky game of chance. Even though high risk and volatility are mostly assumed to be signals for high reward, this isn't always the case, and the need for a prudent risk-reward management approach is paramount. 

Retail investors have tried different approaches, all in a bid to reduce unethical exposure to individual cryptocurrencies without going bankrupt. This is where the Exchange-Traded Products (ETPs), Exchange-Traded Funds (ETFs), and Exchange-Traded Notes (ETNs) gain their relevance. Let's dive into what these terms mean individually. 

Exchange-Traded Products (ETPs)

An ETP is a derivatively priced security entirely backed by the token they are tracking. Using Exchange-Traded Products, traders and investors can have access to cryptocurrencies via a traditional investment-like environment. They use leverage to replicate the performance of a cryptocurrency. 

Exchange-Traded Products can be in the form of an Exchange-Traded Note or an Exchange-Traded Fund. They are like Exchange-Traded Funds because they are cheaper alternatives to actively managed mutual funds and have high liquidity. They are similar to Exchange-Traded Notes because they don't own the tokens. Rather, they hold collateral assets for investors in a trust.  

Exchange-Traded Products could be considered a superset under which the Exchange-Traded Notes and the Exchange-Traded Funds lie. 

The main reasons why investors confidently purchase Exchange-Traded Products include (but are not limited to) basic checks of investors, ease of subscription, significant liquidity, and effective portfolio monitoring and management. Having seen what Exchange-Traded Products are, let's look at the Exchange-Traded Funds and Notes.  

Exchange-Traded Funds (ETFs)

A crypto ETF is a fund consisting of different cryptocurrencies. You can consider this a fruit salad if individual cryptos are different fruits. They trade as one token (you can buy them like you buy Bitcoin or Ethereum), but when you buy an ETF, you are buying the full number of tokens listed under it. Though you cannot adjust or edit the proportion of tokens, they offer diversification benefits with lower fees than if one had bought the cryptocurrencies individually.  

Crypto Exchange-Traded Funds are still illegal in the United States - (the Securities and Exchange Commission is citing safety as their primary concern) - and in some parts of Europe. We believe this is bound to change soon as it is certain that they play a significant role in the crypto market’s future. 

Pending the time cryptocurrency Exchange-Traded Funds become legislated in the United States, several non-US exchanges have launched in-app Exchange-Traded Funds. These funds can be bought and sold with any stable coin like USDT. If not content with this, investors can purchase 'Trusts' similar to the Exchange-Traded Funds but aren't typical. 

Exchange-Traded Notes (ETNs)

Crypto Exchange-Traded Notes are to cryptocurrencies what bonds are to traditional investments. They represent an unsecured debt issued by exchanges or institutions. Investors rely on the creditworthiness of the exchange in hopes of a percentage of returns from the token it tracks. There are no interest payments with Exchange-Traded Notes; only a return of the investment at a known maturity date. 

These debts are unsecured, and investors' capital can be reduced to worthless promissory notes if the institution defaults on its loan payment. It is not a rare occurrence, and it puts more credence to the warning that investors, traders, or enthusiasts should run in-depth background checks on the institution or exchange they hope to buy an ETN from

Having seen what ETFs and ETNs are, let's look at the similarities and differences between them. 

Similarities: Exchange-Traded Funds and Exchange-Traded Notes

  • The main similarity between an Exchange-Traded Fund and an Exchange-Traded Note is that they both track a token and are traded on an exchange. For instance, Bitcoin can be the underlying asset being tracked for trading an Exchange-Traded Fund and an Exchange-Traded Note. 

  • Both are also means of reducing overexposure to a particular token. The Exchange-Traded Funds and Notes are undoubtedly great ways to hedge against cryptocurrency volatility. 

Differences: Exchange-Traded Funds and Exchange-Traded Notes

  • Exchange-Traded Funds are more or less a basket holding different tokens. Buying an ETF may not give you the returns of an individual token, but it also does not put you up for the downsides of owning any of the tokens individually. On the other hand, Exchange-Traded Notes are debt purchases backed by full faith in the issuer.

  • Exchange-Traded Notes have maturity dates. The maturity dates act like deadlines where you receive a yield on your capital. Exchange-Traded Funds are different and can be held for as long as possible. If it is an actively traded fund, there may be some rebalancing of the cryptocurrencies in the fund, but it can be held forever. 

  • Cryptocurrency Exchange-Traded Funds can be actively traded; hence the reward is not fixed. For Exchange-Traded Notes, the rewards are very predictable. 

  • To trade Exchange-Traded Funds, you must collateralize specified tokens in trust of the exchange. This will help the exchange in maintaining and improving its liquidity. The more liquidity you provide, the more profits you're likely to make. Exchange-Traded Notes are different. They deal with debts, and there is a risk of a debt default.

Conclusion

The goal of every cryptocurrency investor, trader, or enthusiast is to make profits, and if that is not possible due to market cycles, capital preservation comes next in importance. 

While Exchange-Traded Products may not put you on mouth-watering profits, with them, you don't get heartbreaking dips, and you get a secure ground for compounding your investment. This puts your investments on the good side of the risk-reward ratio. 

Do you think buying Exchange-Traded Products is a better strategy than purchasing individual cryptocurrencies? Let us know your view in the comments section.

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